Emerging Urban Spatial Patterns in the US, Shanghai, and Accra

Based on the readings titled ‘Lost Trust’, ‘Chinese Port Cities’
and ‘Emerging Urban Form of Accra’, identify and describe
emerging URBAN spatial patterns in the United States,
Shanghai (China) and Accra (Ghana) under globalization.
Instructions. This is a 3-2-paragraph essay and should fit onto
one page, 1.5 spacing and 1-inch margins (About 400 words).
Your second paragraph should identify and describe the
emerging spatial patterns for the core (USA). This paragraph
should be about 100 words.
Your second third paragraph should identify and describe the
spatial patterns for the semi-periphery (China). This paragraph
should be about 100 words.
Your fourth paragraph should make spatial patterns for the
periphery (Ghana). This paragraph should be about 100 words.
Your first paragraph should be a very, very brief introduction
(no more than 2 sentences or about 50 words) and the fifth
should be a very brief conclusion (no more than two sentences
or about 50 words). These make up the 2 in the 3-2- paragraph
essay.
By putting these five paragraphs together, you would have
written an essay about emerging geographies of urbanization
under globalization in the core, semi-periphery and periphery
focusing on spatial patterns ONLY.
Rubic_Print_FormatCourse CodeClass CodeAssignment
TitleTotal PointsHCA-807HCA-807-O500Contrast of Health
Care Structures200.0CriteriaPercentageUnsatisfactory
(0.00%)Less Than Satisfactory (73.00%)Satisfactory

(82.00%)Good (91.00%)Excellent (100.00%)CommentsPoints
EarnedContent70.0%Contrast of Public and Private
Structures20.0%A contrast of public and private structures is
either missing or not evident to the reader.A contrast of public
and private structures is present, but incomplete or inaccurate.A
contrast of public and private structures is presented, but is
cursory and lacking in depth. The research used for support is
outdated.A contrast of public and private structures is
thoroughly presented and includes a discussion of all necessary
elements. The contrast is moderately well supported though
some sources of support are outdated.A contrast of public and
private structures is thoroughly presented with rich detail and
includes a discussion of all necessary elements. The contrast is
well supported with current and/or seminal research.Analysis of
Current Viability and Future Sustainability of Each
Structure20.0%An analysis of current viability and future
sustainability of each structure is either missing or not evident
to the reader.An analysis of current viability and future
sustainability of each structure is present, but incomplete or
inaccurate.An analysis of current viability and future
sustainability of each structure is present, but cursory. The
research used for support is outdated.An analysis of current
viability and future sustainability of each structure is present
and thorough. The analysis is moderately well supported though
some sources of support are outdated.An analysis of current
viability and future sustainability of each structure is present,
thorough, and well-detailed. The analysis is well supported with
current and/or seminal research.Rationale for Selecting One
Structure as Optimal20.0%A rationale for selecting one
structure as optimal is either missing or not evident to the
reader.A rationale for selecting one structure as optimal is
present, but illogical or inaccurate.A rationale for selecting one
structure as optimal is present, but cursory. The research used
for support is outdated.A rationale for selecting one structure as
optimal is present and thorough. The rationale statement is
moderately well supported though some sources of support are

outdated.A rationale for selecting one structure as optimal is
present, thorough, and well-detailed. The rationale statement is
well supported with current and/or seminal research.Synthesis
and Argument10.0%No synthesis of source information is
evident. Statement of purpose is not followed to a justifiable
conclusion. The conclusion does not support the claim made.
Argument is incoherent and uses non-credible sources.Synthesis
of source information is attempted, but is not successful.
Sufficient justification of claims is lacking. Argument lacks
consistent unity. There are obvious flaws in the logic. Some
sources have questionable credibility.Synthesis of source
information is present, but pedantic. Argument is orderly, but
may have a few inconsistencies. The argument presents minimal
justification of claims. Argument logically, but not thoroughly,
supports the purpose. Sources used are credible. Introduction
and conclusion bracket the thesis.Synthesis of source
information is present and meaningful. Argument shows logical
progressions. Techniques of argumentation are evident. There is
a smooth progression of claims from introduction to conclusion.
Most sources are authoritative.Synthesis of source information
is present and scholarly. Argument is clear and convincing,
presenting a persuasive claim in a distinctive and compelling
manner. All sources are authoritative. The synthesis and
argument in the paper are of publication caliber.Organization
and Effectiveness25.0%Thesis Development and
Purpose20.0%Paper lacks any discernible overall purpose or
organizing claim.Thesis and/or main claim are insufficiently
developed and/or vague; purpose is not clear.Thesis and/or main
claim are apparent and appropriate to purpose.Thesis and/or
main claim are clear and forecast the development of the paper.
They are descriptive and reflective of the arguments and
appropriate to the purpose.Thesis and/or main claim are clear
and comprehensive; the essence of the paper is contained within
the thesis. The development indicated by the thesis and/or main
claim is acceptable for publication.Mechanics of
Writing5.0%Mechanical errors are pervasive enough that they

impede communication of meaning. Inappropriate word choice
and/or sentence construction are used.Frequent and repetitive
mechanical errors distract the reader. Inconsistencies in
language choice (register), sentence structure, and/or word
choice are present.Some mechanical errors or typos are present,
but are not overly distracting to the reader. Correct sentence
structure and audience-appropriate language are used.Prose is
largely free of mechanical errors, although a few may be
present. A variety of sentence structures and effective figures of
speech are used.Writer is clearly in command of standard,
written, academic English.Format5.0%APA
Format5.0%Required format is rarely followed correctly. An
appropriate number of topic-related scholarly research sources
and related in-text citations is not present. No reference page is
included. No citations are used.Required format is attempted,
but some elements are missing or mistaken. A lack of control
with formatting is apparent. Some included sources are not
scholarly research or topic-related. Reference page is present.
Citations are inconsistently used.Required format is used
correctly, although some minor errors may be present. Scholarly
research sources are present and topic-related, but the source
and quality of some references is questionable. Reference page
is included and lists sources used in the paper. Sources are
appropriately documented, although some errors may be
present.Required format is fully used. There are virtually no
errors in formatting style. Scholarly research accounts for the
majority of sources presented and is topic-related and obtained
from reputable professional sources. Reference page is present
and fully inclusive of all cited sources. Documentation is
appropriate and citation style is usually correct.The document is
correctly formatted to publication standards. All research
presented is scholarly, topic-related, and obtained from highly
respected, professional, original sources. In-text citations and a
reference page are complete and correct. The documentation of
cited sources is free of error. The paper could readily be
accepted for publication.Total Weightage100%

Accra’s expansion can be
characterized as a quality
residential sprawl resulting
in a unicentric urban form.
Local forces have interacted
with global forces, and
human agents have taken
advantage of what has been
provided.
Structural Adjustment and Emerging
Urban Form in Accra, Ghana
Ian E. A. Yeboah
Researchers have postulated the emergence of new urban
forms in the Third World (TW), which are characterized by
either a deconcentration of urban functions to peri-urban
or smaller cities (polycentric), or a fusion of urban and rur-
al functions (desakota). This paper provides empirical evi-
dence, in the form of the phenomenal growth of Accra, on
emerging urban forms. It argues that Accra’s growth is a
quality residential sprawl with unicentric tendencies, rath-
er than either a deconcentration of urban functions or a fu-

sion of urban and rural functions. For Accra, globalization,
economic growth, and Structural Adjustment have helped
the state provide enabling circumstances for global and lo-
cal factors to contribute to the city’s expansion. Based on
the case of Accra, the paper raises a series of questions that
relate to generalization, planning, and the management of
sub-Saharan African cities (SSACs).
Introduction
This paper is about the growth and expansion of SSACs and
emerging ur-
ban forms. SSACs in this paper exclude the relatively
westernized cities
of Southern Africa, such as Harare, Cape Town, and
Johannesburg. The pa-
per focuses on Accra, Ghana, which has undergone remarkable
areal ex-
pansion over the last fifteen years. What is emerging in Accra is
a uni-
centric urban form that is characterized as a quality residential
sprawl.
Accra’s expansion has coincided with Ghana’s Structural
Adjustment Pro-
gram (SAP), which has led to a general growth of the nation’s
economy. In a
sense, therefore, this paper explores the relationship between
economic
growth and urbanization in the TW. The question is whether the
relation-
ship between Accra’s growth and its SAP is real or coincidental.
The literature on TW urban form and economic growth is
character-
ized by two theories of urban growth and expansion in Asia
(McGee 1991)

and Latin America (Gilbert 1993). Globalization, economic
growth, and
SAPs are associated with both theories. Limited research
attention has
been given to SSACs. Knowledge of cities such as Accra,
however, suggests
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that specific urban forms are emerging in sub-Saharan Africa
(SSA). The
purpose of this paper, therefore, is to situate the expansion of
cities like
Accra within the framework of globalization, economic growth,
and Struc-
tural Adjustment, as well as within the broad literature on urban
form in
the TW. A review of TW urban form and SAP theories, in the
first section,
reveals that limited research exists on SSACs. This lacuna
provides the
rationale for this paper. The second section of the paper

examines methods
of analysis, substantiating why Accra is a good case study. This
is followed
by a third section that maps the physical expansion of pre- and
post–SAP
Accra. The nature of Accra’s expansion is characterized in the
fourth sec-
tion. The fifth section provides an explanation for Accra’s
expansion. The
paper concludes with questions centered around planning,
management,
and comparative research on globalization, Ghana’s SAP, and
economic
growth.
The Literature on Third World Urban Form
TW urbanization has been influenced in the past two decades by
global
economic restructuring, SAPs, economic growth, poverty
alleviation pro-
grams, the effects of natural disasters and wars, and
environmental degra-
dation. In terms of research, it is globalization, Structural
Adjustment, and
economic growth that have had the greatest impact on the
spatial as-
pects of TW cities (McGee 1991; Gilbert 1993). Research on
globalization,
Structural Adjustment, and economic growth has led to the
postulation
of two theories in the literature by Gilbert (1993) and McGee
(1991). Gil-
bert (1993) argues that a deconcentration of urban functions to
the periph-
ery of TW cities, as well as smaller urban centers, has occurred.

This de-
concentration is associated with Structural Adjustment, the
globalization
of economic activity, and local manifestations of these in the
TW. Gilbert
believes that a process of polarization reversal has led to a
slowdown in the
growth of megacities, and the expansion of both secondary
cities and the
peri-urban areas of major cities of the TW. Thus, a polycentric
urban form
seems to be emerging in the TW. In terms of Gilbert’s postulate,
two issues
need clarification. First, is the emergence of these new urban
forms univer-
sal to the TW as a whole, or to Latin America in particular?
Second, is the
deconcentration out of city centers the same as polarization
reversal with-
in an urban system, or are they different?
Specifically for Latin America, these two patterns of urban
growth
have been recognized and explained. Villa and Rodriguez
(1996) argue that
in the 1970s a common trend evident in the expansion of Latin
American
megacities, such as Buenos Aires, Caracas, Lima, and Mexico
City, was
that as cities expanded, their old administrative areas either did
not grow
or declined in population. From the 1980s onward, however,
much of the growth is no longer within the urban perimet-
er. It has shifted to a number of towns and secondary ci-

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ties within the wider metropolitan region but some dis-
tance from the main urban center. (Villa and Rodriguez 1996:
39)
This is what Richardson (1989) originally referred to as
polarization re-
versal.

Debate exists as to the causes of polarization reversal (Gilbert
1993;
Villa and Rodriguez 1996: 27), but there is no doubt that it is
associated
with economic growth and globalization. Most of the evidence
in support
of Gilbert’s ideas on deconcentration and polycentric
urbanization focuses
on megacities in Latin America (Morris 1978: 306; Ward 1993:
1148–9; Gil-
bert 1996a: 98–100; Riofrio 1996: 170; Rowland and Gordon
1996). Perhaps
the city which best reflects the deconcentration of economic
activity to
surrounding towns, leading to a polycentric formation, is
Greater Sao Pau-
lo, where in the 1980s, for example, industrial employment in
the city
grew by only 3% whereas areas outside grew by 18%. This
structural loca-
tion shift is also manifest in terms of profitability (Santos 1996:
228).
Many branch assembly plants are locating in industrial
towns within 200 km radius of the city of Sao Paulo such as
Sao Jose dos Campos, Piraciciba, Americana, Limeira, Rio
Claro and Campinas. . . . In other words, we are witnessing
the extension of the localization economies of existing in-
dustrial complexes from the strictly ‘urban’ to a somewhat
broader ‘regional scale.’ (Storper 1991: 61–2, quoted in Gil-
bert 1996b)
It is safe to conclude that the emergence of urban forms
characterized by
deconcentration and polycentric formation are evident in Latin

America,
especially on the megacity scale.
The other theory, associated with McGee (1991), argues that, in
spe-
cific Asian countries such as Malaysia, there has been a fusion
or merging
of urban and rural places and functions. McGee argues that
population
growth, a shift from agriculture to industry and services, and
improve-
ments in transportation networks have resulted in the increasing
mix of
rural and urban activities in peri-urban areas of major Asian
cities, such as
Hong Kong, Guanghouz, and Jakarta. McGee (1991) concludes
that what is
occurring in Jakarta, for example, is the merging of rural and
urban func-
tions. Thus, he coins the term desakota as a description of such
urban
structural change.
There is substantial evidence to support McGee’s view that
desa-
kotas are emerging in Association of South East Asian Nations
(ASEAN)
countries (McGee and Greenberg 1992; Dharmpantni and
Firman 1995:
297–99; Ocampo 1995; Firman 1996). Thong (1995) argues that
external
forces have shaped the development of Kuala Lumpur, and that
the periph-
ery of the city has grown faster than the city proper. Between
1981 and
1990, the periphery of Kuala Lumpur grew in population by

4.3%, whereas
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the inner areas of the city only grew by 1.99%. Also, over one-
third of all
approved industrial projects, employment opportunities, and
industrial in-
vestment was on the periphery of Kuala Lumpur. For ASEAN
countries,
therefore, the evidence suggests that the concept of desakota
describes
the general pattern of urban form even though the specific
causes and na-
ture of this concept differ from country to country. Increasingly,
the litera-
ture on this region suggests that world cities and mega-urban
regions have
emerged (McGee 1995; Lo and Yeung 1996).
Many of the processes associated with these emerging urban
forms

in Latin America and ASEAN are present in many parts of SSA,
but very
little research evidence on emerging urban forms in the region
exists.
Structural Adjustment programs have increasingly linked
countries such as
Ghana to the global system. Economic activity (especially the
extraction
of primary products and retailing) has picked up in Ghana’s
cities, and Ac-
cra, in particular, has experienced peri-urban expansion over the
last twen-
ty years. Ghana’s economy is estimated to have grown by an
average of
5% per annum since the late 1980s (ISSER 1995). Such
expansion reveals a
number of interesting characteristics that require research
attention. De-
spite developments of this nature in cities such as Accra, the
literature on
the spatial expansion of cities in SSA is scanty, dated, or
characterized by a
limited relationship between global economic forces, economic
growth,
and emerging local spatial form.
For example, Onibokun’s (1989) characterization of the
expansion of
Ibadan, Kaduna, and Enugu, although an interesting study, is
based on 1985
data and does not consider the effects of recent SAPs in the
region and
their effects on emerging local spatial form. Onibokun’s study,
however,
relates urban expansion to service provision. Also, the recent
United Na-

tions book, The Urban Challenges in Africa, edited by Rakodi
(1997c), has
a set of useful chapters on individual cities alongside chapters
that synthe-
size urban theoretical issues on Africa. None of the chapters
specifically
addresses emerging spatial patterns in cities of the region,
especially as
they relate to SAPs. Rakodi’s (1997a) and Simon’s (1997)
chapters in the
volume identify the importance of globalization and SAPs to the
periph-
eral status of African cities. Simon’s, in particular, examines
the relation-
ship between economic growth and urbanization, and concludes
that the
relationship is not a clear-cut one. Yet the spatial implications
of this rela-
tionship are not addressed. The individual city case studies
hardly address
emerg-ing urban spatial forms under globalization and SAPs.
Dubresson’s
(1997) chapter on Abidjan gives the closest indication of the
effect of eco-
nomic growth and postindependence modernization on the
growth and ex-
pansion of Abidjan, but it does not look at the effect of recent
SAPs on
urban spatial form. Yousry and Atta’s (1997) chapter provides
only a brief
assessment of the physical growth of Cairo, from A.D. 980 to
1994. Only a
statement on the contribution of the private housing sector to
Egypt’s gross
domestic product is provided (Yousry and Atta 1997: 133–5),
without em-

phasizing the implications of this to urban expansion and form.
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There is no doubt that the scanty data on SSA and its cities has
con-
tributed to an absence of research on emerging urban form. Yet
a pletho-
ra of literature concerning the effects of SAPs on various

sectors of SSA
exists on education (Cobbe 1991; Sowah 1993; Daddieh 1995),
health
(McCarthy-Arnolds 1994; Thesien 1994; Logan 1995),
employment and la-
bor (Herbst 1991; Muenen 1995; Fashoyin 1996), and rural
development
(Mikell 1991). The few references to the relationship between
SAPs and
urban form include the work of Riddell (1997), and Jeffries
(1992), respec-
tively.
Adjustment programs have altered cities. From a position of
leadership in national economies and a magnet attracting peo-
ple from the countryside, the city has become the focal point
of national depression. (Riddell 1997: 1303)
There is no doubt that, for some segments of populations in
African cities,
this scenario may be real. But it is only for a segment of the
population,
usually the poorer segment. In fact, in the early years of the
SAP in Gha-
na, Accra seemed at a standstill since most of the respondents in
Jeffries’
(1992) survey expected their economic circumstances to
improve in the
near future. It is difficult to determine whether this standstill
was brought
on by the SAP or was a direct continuation of the economic
stagnation
that had plagued the country just before SAP implementation.
Increas-
ingly, though, SSACs which have undergone over a decade of
SAPs have

not become the points of national depression.
With forty-two sub-Saharan African countries embarking upon
SAPs,
the relationship between SAPs and urban spatial form and
expansion will
increasingly become a variable in planning the delivery of jobs,
housing,
services, and infrastructure in cities of the region. Thus, it is
germane to
understand the nature and causes of urban spatial expansion and
emerging
forms within the region. The rationale for this paper is to
appreciate and
understand what is occurring to the growth and expansion of
SSACs within
the context of globalization, economic growth, and implemented
SAPs. It
is important to ask questions about what has been happening in
sub-Sa-
haran African urban form under SAPs, why such forms are
emerging, and
what these forms mean. Before dealing with the specific
objectives of the
paper, though, it is imperative to explain why Ghana and Accra
have been
chosen, and to explain the kinds of data, methods, and analyses
used in
this paper.
Data and Methods of Analyses
Accra is not the largest or the most researched city in SSA.
Estimates
are that its metropolitan population is between 2 and 2.5 million
people.

As with most African capitals, it is not a major global city. Yet
dramatic
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growth of the Ghanaian economy under its SAP and the
remarkable expan-
sion of Accra make it a good case study. This is moreso because
the SAP
has strengthened the link between Ghana and the global
economic, cul-
tural, and political system. In fact, the World Bank has
identified Ghana
as a success story under Structural Adjustment (Alderman
1994). There is
no doubt that the Ghanaian economy was in the doldrums prior
to 1983
(Ewusi 1984; Frimpong–Ansah 1991). Since the Rawlings
government in-
stituted its Economic Recovery Program (ERP), which was
followed by the
SAP, the economy has grown by an estimated 5% each year

(ISSER 1995).
Inflation, although still high, is nowhere near the pre–SAP
levels. Relative
incomes have not increased, but, compared to the early 1980s,
there is now
an abundance of consumer goods in shops and markets in the
country (Nin-
sin 1991; Rothchild 1991). Perhaps the most convincing
evidence of eco-
nomic growth is seen in the extent to which the middle class
engages in
conspicuous consumption of automobiles, housing, cellular
phones, inter-
national air travel, and other western cultural attributes. Such
consump-
tion begs the question whether what has happened in Ghana
constitutes
development. There is, however, no doubt that the economy has
grown
because Ghana has embarked upon Structural Adjustment and,
as such,
has been linked strongly to the global system of production,
distribution,
and consumption. It is the nexus of local-global interaction
(i.e., economic
growth and urban form) that is at the heart of this paper.
Two main approaches of measuring urban growth and city
expan-
sion exist in the literature. The first examines demographic
growth, eith-
er by natural increase or rural-urban migration (Preston 1988;
United Na-
tions 1994). In some cases density of population within areal
units (e.g.,
census tracts) also gives an indication of urban growth. There is

a general
unavailability and unreliability of population data, and data on
urban den-
sity in Ghana and SSA as a whole (Ohadike 1991; Rakodi
1997a; Simon
1997). The last census in Ghana was taken in 1984 (roughly
coterminous
with the beginning of the SAP), and thus, comparing the pre-
and post–SAP
periods, using demographic data, is impossible.
The second method measures urban areal expansion, rather than
de-
mographic growth, and looks at the expansion of built-up areas
of cities.
Mapping legal incorporation of land to a city, or encroachment
and sprawl
(often illegal) of a city onto rural communities and green
spaces, can be
used. In this vein, density of building (which can be determined
by the
issuing of building permits) in areal units can give an indication
of expan-
sion and growth. In the case of Accra, incorporation does not
exist as a
planning tool, and most of the city’s expansion has been by
encroachment
and sprawl. In discussion with local planning officials, it is
evident that
most builders just ignore the requirement for permits before
building, and
the administrative agencies do not have the resources for
enforcement. In
fact, Ewutu Efutu Senya District (EESD) only started requiring
permits for
buildings in Kasoa in 1995. In the case of Ga Rural Assembly

(GRA), esti-
mates are that up to 50% of all buildings have been erected
without per-
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mits. Building permits are, therefore, an unreliable yardstick for
measur-
ing the areal extent of expansion of Accra.

Since demographic data is unavailable and building permits are
unre-
liable, the most reliable and available alternative method to
determine
Accra’s expansion is to use the areal photographs taken of
Accra in 1986,
1992, and 1997, in order to map out the city’s expansion. The
most recent
topographic map of Accra, produced by the Survey Department
of Ghana,
was in 1975. Therefore, it is possible to map the areal expansion
of Accra
in a synoptic fashion, from 1975 through 1986, 1992, and 1997.
The infor-
mation on this map was confirmed by ground surveys to
determine its
accuracy.
This paper, for the purposes of the pre–SAP era is considered to
be
from 1975 to about 1986. The post–SAP era is from 1986 to
1997. Each pe-
riod is about eleven years. Ghana’s SAP officially started in
1986, although
the Rawlings government in 1983 had instituted similar
austerity mea-
sures (Adepoju 1993). The derived map of Accra’s physical
expansion does
not indicate the density of development associated with this
areal expan-
sion. Because of the unreliability of building permits, the
alternative is to
count, by field surveys, the number of buildings in each census
tract or
new expansion of Accra. Obviously, this is impossible to do. To

comple-
ment the mapping of Accra, therefore, recent research by
Odame Larbi
(1994), which gives an indication of development density for
parts of peri-
urban Accra, will be used to complement the map of the
physical expan-
sion of Accra. It should be stressed that the derived map shows
the expan-
sion of Accra, but does not give a count of the number of
buildings, or
population distribution.
Another complement to the map of Accra’s expansion is a
survey
which was undertaken in four of the new developments to
investigate three
main questions in the literature. The first of the three questions
concerns
whether the massive expansion of Accra is fueled by long-
distance build-
ers, who are mostly Ghanaians resident abroad (Diko and Tipple
1991,
1992). The purpose was to find out whether or not it is
Ghanaians, residing
abroad, who fueled the building boom in Accra. The second
question con-
cerns the wages of Ghanaians abroad, and asks whether Western
wages,
even for menial jobs, can support building of houses in Ghana
(Owusu
1998). The purpose of this question was to find out whether
class matters,
in both the ability to build, and the locational preference of
Ghanaians re-
siding abroad. This is why it was appropriate to choose four

new develop-
ments that cut across class lines. These four developments are
represent-
ed by the relatively high socioeconomic class with a foreign
orientation
(East Legon), the locally oriented high class (Haatso), the
middle-class area
(Sakumono), and the lower-class area (Kasoa). The third
question was to
designed find out if people who build in distant parts of peri-
urban Accra
are connected to Accra and if they consider themselves
residents of Accra.
Even though administrative boundaries give the impression that
most of
the new developments are not part of Accra (Department of
Town and
africa
T
O
D
A
Y
S
T
R
U
C

T
U
R
A
L
A
D
JU
S
T
M
E
N
T
A
N
D
E
M
E
R
G
IN
G

U
R
B
A
N
F
O
R
M
IN
A
C
C
R
A
, G
H
A
N
A
6
8
Country Planning 1991), residents in these developments are
strongly con-

nected to the central city. In fact, Ghanaians consider most of
the expan-
sion of the city as a part of Accra. The purpose was to
determine the com-
muting patterns of residents in these new developments, each of
which are
located between 10 and 18 miles from central Accra, at various
cardinal
locations.
Between June and July 1997, ten respondents were interviewed
from
four residential developments in Accra. The criterion used in
selecting re-
spondents was their willingness to be interviewed if they owned
a house in
the development. On the surface, a sample of forty is not large
enough.
The emphasis, however, was to have intensive, rather than
extensive, in-
terviews with the respondents, and to get a sense of the
strategies of people
who build in Accra. The sample size was constrained by the fact
that indi-
viduals were asked to reveal their sources of finances. This is
an uncom-
fortable topic for people in Ghana. Also, it would be difficult to
determine
the representative sample size for a population in which
building is an
ongoing process. The data collected was not used for inferences,
but only
to give an exploratory description of the three questions
identified. The
results of this survey should thus be seen as complementary,
rather than

definitive.
What Has Happened to Accra’s Spatial Form?
Figure 1 maps the physical expansion of the built-up area of
Accra for 1975,
1986, 1992, and 1997. Accra has expanded remarkably over the
past twen-
ty-five years. Most of the expansion has been post–SAP,
occurring in peri-
urban Accra, rather than central Accra (away from the already
built-up
areas of the Accra Municipal Assembly (AMA) and Tema
Municipal As-
sembly (TMA) to rural areas covered by GRA and EESD).
Today, Accra
stretches for about 36 miles from east to west, and about 18
miles from
south to north. Overall, between 1975 and 1997, Accra has
expanded in
area by 200.7 square miles, or by 318% over the 1975 area. This
is phenom-
enal! But very little of this expansion occurred pre–SAP (i.e.,
between 1975
and 1986), with the greater part occurring post–SAP. Pre–SAP,
the city ex-
panded in area 28.8 square miles, or by 46% over the 1975 area.
Yet post–
SAP, the city expanded 171.9 square miles, or by 186% over the
1986 area.
Even in the post–SAP era, as Table 1 shows, most of the
expansion has
been between 1992 and 1997 (or late post–SAP).
Pre–SAP (1975–1986), most of the expansion was on the fringe
of the

1975 metropolitan boundary, in three areas: (1) around the
northern part of
the motorway extension (East Legon, South Legon, North
Dzorwulu, Dzor-
wulu, North Achimota, and Abeka); (2) around the western
flank of the
motorway extension, where it meets the Accra-Winneba Road
(Gbawe,
Malam, McCarthy Hill, and the area south of this toward
Dansoman); and
(3) the area immediately surrounding Teshie and Nungua. Post–
SAP ex-
africa
T
O
D
A
Y
IA
N
E
. A
. Y
E
B
O

A
H
6
9
pansion was mostly in areas immediately abutting the built-up
urban area
in 1986, especially northward. Early post–SAP expansion
(1986–1992) has
been a filling-in of the area between Teshie, Nungua, the
original motor-
way (the opening of Spintex factory and the road to it facilitated
this ex-
pansion), and north of that to North Legon, Haatso, and Papao
(in GRA).
Other areas of expansion during this period include Weija and
Kasoa in the
east (the latter in EESD), and northern communities of Tema
and Ashia-
TABLE 1: Physical (Areal) Expansion of Accra, 1975–1997
Year/Period Number Area (miles2) Increase in Percentage
of Years Area (miles2) Change
1975 62.918
1986 91.709
1992 134.182
1997 263.610
1975–1986 11 28.791 45.76
1986–1992 6 42.473 46.31
1992–1997 5 129.428 96.46
1986–1997 11 171.901 187.44
1975–1997 22 200.692 318.97

africa
T
O
D
A
Y
S
T
R
U
C
T
U
R
A
L
A
D
JU
S
T
M

C
C
R
A
, G
H
A
N
A
7
0
man. Late post–SAP expansion (1992–1997), however, has been
mostly to
the north and west of what already existed, and to a large
extent, expan-
sion has generally focused on green spaces in GRA and EESD.
Thus, spe-
cific transportation routes seem to have facilitated the
expansion both pre-
and post–SAP but, expansion post–SAP has been a sprawl into
rural areas
in all directions from the coast, compared to the pre–SAP trend
which was
on land immediately abutting the built-up area of 1975.
How Has the Urban Form of Accra Changed?
The expansion of Accra is characterized by seven attributes.
Based on these
seven attributes, Accra’s expansion can be characterized as a

quality resi-
dential sprawl resulting in a unicentric urban form. The
relationship be-
tween these seven attributes and Accra’s emerging urban form
is described
in Figure 2. The first of these attributes is that Accra’s
expansion has been
spontaneous and unplanned. This is similar to what Riofrio
(1996) has de-
scribed for Lima, Peru. Due to the lack of planning and
development con-
trols (Odame Larbi 1996), Accra’s expansion mimics the
haphazardness of
a sprawl into peri-urban areas. The city has expanded by either
encroach-
ing on rural settlements or into green spaces between rural
settlements.
This trend is evident in the city’s expansion to Kwabenya where
the Atom-
africa
T
O
D
A
Y
IA
N
E
. A

. Y
E
B
O
A
H
7
1
ic Energy Commission properties and the village of Kwabenya
still exist:
the expansion has occurred around these existing properties.
Expansion
into both Ashongman and Adenta has followed such a pattern.
In some
cases, however, green spaces not associated with rural
settlements have
been encroached upon. The expansion between Teshie, Nungua
and the
Accra-Tema Motorway is characterized by this pattern.
Although Accra’s
expansion is largely unplanned, in a few cases, such as Pokuase
Estates,
African Concrete Products planned and built its development in
isolation
from the village of Pokuase.
The second attribute is that building development and
population
density is low in peri-urban Accra. Low-density development
has been
manifest in two ways. First, a bird’s-eye view of Accra reveals

that clus-
ters of buildings dot the greenery of the countryside and the
density of de-
velopment in most places is rather low. Odame Larbi (1996:
204) estimates
that less than 80% of East Legon, less than 50% of McCarthy
Hill and East
Legon Extension, less than 40% of East and West Adenta, less
than 30% of
North Dome and Haatso, and less than 20% of Nkwantanang
have been
built up. Thus, there are still a lot of undeveloped plots in these
areas. An
assessment of building density is that it decreases the further
away one
moves from the coast. This indicates that the process of
expansion or sprawl
is ongoing, especially since uncompleted houses are common.
Low-densi-
ty development is secondly manifest in the intensity of land use
for build-
ing. Even in cases where houses have been completed, these
tend to be
single-family dwellings with low population densities, rather
than flats or
apartments. One- and two- story houses predominate. This
practice is sim-
ilar to what pertains in Lima, Peru, where there is an
unfortunate tendency toward low-density development. The
outward spread of the city has occurred in an uncontrolled
and highly irresponsible manner. (Riofrio 1996: 170)
In Accra, the building materials used, the way in which
buildings are erect-
ed, low land values, and uniquely Ghanaian cultural traits

account for this.
Since most buildings in Ghana are of cement blocks, concrete,
and mor-
tar, providing a flow on top of a first floor for a second and
subsequent
third level is rather expensive. In the light of low land values
(discussed
later), most builders have resorted to just a few stories. Despite
the pre-
ponderance of …
IDPR, 31 (4) 2009 doi:10.3828/idpr.2009.5
Yefang Huang
The growth of global hub port cities under
globalisation
The case of Shanghai international shipping centre
Yefang Huang is a Senior Instructor in the Department of
Geography and Resource Management, The Chinese
University of Hong Kong, Shatin, NT, Hong Kong; e-mail:
[email protected]
Paper submitted June 2008; revised paper received and accepted
September 2009
This article takes the Shanghai international shipping centre as
a detailed case study of the relations
between port and city. The relationship between port growth,
economic development and foreign trade
is examined in detail. The article argues that the success of
urban development in Shanghai results from
both the favourable market opportunities and the rational urban
development strategies pursued by the

city government of Shanghai. Massive foreign direct investment
in Shanghai has resulted in large-scale
outward-processing activity and explosive growth in imports
and exports. The article shows that the Asian
hub port-city consolidation model has ignored the differences
between port cities in the region. Three
models of global hub port-city are proposed to describe the
different cases of Hong Kong, Singapore
and Shanghai. Shanghai fits the model of a city-serving global
hub port-city, which is different from Hong
Kong and Singapore. This reflects the particular stage of hub
port-city development of Shanghai and its
particular economic relationship with the hinterland.
Rapid urban development in Shanghai has caught the attention
of many scholars. In
the context of socialist transitional economies, central and
local states are considered
important driving forces in the rapid rise of Shanghai (Zhang,
2002; Wu, 2000). The
importance of geographical conditions and external forces such
as FDI (foreign direct
investment) in the rapid development of Shanghai have also
been recognised (see, for
example, Wei and Leung, 2005; Wei et al., 2006; Yusuf and
Wu, 2002).
Since international trade relies predominantly on shipping, port
cities play a
crucial role in the development of regional economies. The ten
largest cities in the
US in 1920 were developed as port cities, and most of them
remain important even
though their ports have become less important relative to other
economic activities
(Fujita and Mori, 1996; Ducruet and Lee, 2006).

The explosive growth in world trade associated with the spatial
dispersion of
production and consumption during the past 40 years has
resulted in the emergence
of several giant ports in Asia, including Singapore, Hong Kong,
Shanghai and
Shenzhen (Airriess, 2001a; 2001b; Loo and Hook, 2002; Chu,
1994; Shen, 2008a; Lee
et al., 2008). The global production network is shaping and
being shaped by a global
port system (Airriess, 1993; Hesse and Rodrigue, 2006; Lee and
Rodrigue, 2006).
Global manufacturing capacities have been relocated
dramatically from developed
countries to developing countries through large-scale FDI,
necessitating the large-
IDPR31_4_05_Huang.indd 423 10/11/2009 12:17
Yefang Huang424
scale intercontinental shipping of raw materials, components
and consumer goods.
Due to keen competition, there is a global trend towards the
concentration of liner
services at hub ports (Cullinane et al., 2004).
Propelled by China’s WTO (World Trade Organization) entry,
the Chinese
economy is rapidly integrating with the world economy. The
most rapid economic
development and export growth has taken place in three coastal
regions, including the

Pearl River Delta (PRD), the Yangtze River Delta (YRD) and
the Bohai Ring region,
creating great demand for international shipping services (Shen,
2008a; Yeung and
Shen, 2008a; 2008b; Luo and Shen, 2009). There is a good
opportunity for developing
a few large container ports in coastal China. Various cities are
keen to compete for
such hub ports (Cullinane et al., 2004; Shen, 2007; Luo and
Shen, 2009).
Many studies have examined the changing relations between
port and city (Hoyle,
1989; Lee et al., 2008; Notteboomm and Rodrigue, 2005;
Ducruet and Lee, 2006).
Lee et al. (2008) provided a comprehensive review of the
changing relations between
port and city in developed and developing countries. In contrast
to a Western port-
city model, they proposed an Asian hub port-city consolidation
model. But very few
studies have focused on Shanghai port, although Wang and
Slack (2004) analysed
port governance in China using Shanghai port as a case study.
They found that the
central and local governments are still playing key roles in
reforming ports and other
components of the transport logistics system.
This article argues that the success of city and port
development in Shanghai
results from favourable market opportunities and the rational
development strategies
pursued by the city government of Shanghai. It will examine
the relationship between
port and city development in Shanghai. Different from mega-

hub ports such as Singa-
pore and Hong Kong, throughput in Shanghai port mainly relies
on its own cargo
with little trans-shipment (Fremont and Ducruet, 2005). Lee et
al.’s (2008) Asian hub
port-city consolidation model has ignored the differences
between Asian port cities.
Three models of global hub port-city will be proposed in this
article to describe the
different cases of Hong Kong, Singapore and Shanghai. The
article will contribute
to a better understanding of port and city development in
developing countries,
especially China.
The rest of article is organised as follows. The next section
will discuss globali-
sation, the transport revolution and changing port–city
relations. The article then
describes the opening and development of Shanghai in the
reform period to provide
a background. The following two sections examine the
development of Shanghai’s
international shipping centre and analyse the relationship among
port growth,
economic development and foreign trade. This is followed by a
discussion on the
models of global hub port-cities. Some conclusions are reached
in the final section.
IDPR31_4_05_Huang.indd 424 10/11/2009 12:17
The growth of global hub port cities under globalisation 425

Globalisation, transport revolutions and changing port–
city relations
The world economy is driven by trade, which is facilitated by
transportation and
logistics services. ‘Shipping’ is the physical process of
transporting goods and cargo
by land, air and sea. Shipping by sea is the most important and
economical form of
cargo transportation, especially over long distances. In this
article, only shipping by
sea is considered, and thus ‘shipping’ generally refers to
shipping by sea. Ports are
terminals that receive ships and transfer cargos. The ‘shipping
industry’ refers to the
whole business of shipping, which generally develops in port
cities. Cities get access to
shipping services via ports, so the location of ports has major
implications for trans-
portation and trading. As a result, ports and cities have close
relations.
Globalisation and technology improvements are important
forces of change in
the spatial patterns of the world’s port system. The world
economy has been shaped
by economic globalisation, with increasing flows of capital,
trade and information
assisted by deregulation and technological innovation (Airriess,
2001a; Li and Gray,
2002). Global and regional production and trade networks have
been formed, and
require more sophisticated cargo transportation.
Transportation revolutions such as containerisation, expanding
the size of ships
and intermodalism,1 as well as shipping alliances, result in

competition and coopera-
tion in the port industry. To increase efficiency, shipping lines
seek to concentrate
their services in a few hub ports. As ships can move easily,
shipping lines have great
freedom to choose ports. Thus ports are forced to build deep-
water terminals and
expand back-up areas to enhance competitiveness. As a result,
there is greater traffic
concentration in several hub ports (Lee et al., 2008).
Generally, the port industry has become less important in
Western cities, which
are increasingly based on services rather than manufacturing.
For example, the port
area of New York was stagnant after the growth period of
1900–50. Its total trans-
shipment of goods declined from 115 million tons in 1979 to 41
million tons in 1995
(Meyer, 1999). As containers can be moved from one port to
many destinations via the
seamless intermodal system using various modes of
transportation, port activities tend
to be concentrated, resulting in strong competition. For
example, port authorities have
initiated and supported the competition between Baltimore and
Hampton Road for
the position of mid-Atlantic load centre (Starr, 1994).
In developing countries, ports originated from fishing and naval
harbours. Colonial
ports were established in existing cities with deep water, large
spaces and good connec-
tions between the foreland and the hinterland. Previous studies
have shown increasing
levels of port concentration, but port cities in developing

countries are less negatively
1 Intermodalism refers to the movement of international
shipments via containers using sequential transportation
modes such as water, air and land.
IDPR31_4_05_Huang.indd 425 10/11/2009 12:17
Yefang Huang426
affected by globalisation (Lee et al., 2008; Notteboomm and
Rodrigue, 2005).
Historically, there has been a close relationship between the
growth in demand
for freight and passenger traffic, and economic growth
(Airriess, 1993; Hesse and
Rodrigue, 2006; Lee and Rodrigue, 2006; Banister and
Berechman, 2001; Fujita and
Mori, 1996). Port growth is driven by economic growth in the
city and its hinterland.
In city-regions, such as the Hong Kong-PRD region, rapid
expansion in industrial
production and international trade has stimulated the growth of
leading container
ports, including Hong Kong and Shenzhen. The growth of
ports, shipping and trade
services in turn stimulated the growth of service sectors such
as logistics and financial
services (Shen, 2008a; Yeung and Shen, 2008a). Thus port cities
are well placed to
act as growth centres and as centres of innovation and
modernisation (Gleave, 1997).
Consequently, the shipping industry is a very important sector

in some major cities in
the world, including Hong Kong, Singapore and Shanghai in
Asia. As in Singapore,
Shanghai’s government considers the development of the port
as an integral process
of urban development and takes a leading role in the
development of port infrastruc-
ture (Airriess, 2001a).
Generally, ports can be categorised into hub ports, non-hub
ports and feeder ports
according to their role in regional or international shipping
services (Wang and Slack,
2004). A hub port is an international shipping centre that offers
cross-ocean interna-
tional shipping services with connections to feeder ports for
trans-shipment. Feeder
ports do not have cross-ocean services but are connected with
hub ports by river and
coastal vessels. Non-hub ports may have limited cross-ocean
services and connections
with feeder ports.
The term ‘international shipping centre’ is used in China and
refers to an impor-
tant hub port-city that is equipped with a container hub port and
has a strong shipping
industry (DWTMC, 1999, 75). The container hub port is the
most important hardware
in an international shipping centre.
There is an inherent connection between a shipping centre, a
trade centre and
a financial centre. The history of urban development shows that
an international
financial centre is developed on the basis of advanced trade

business (Reed, 1981).
Thus becoming a strong international trade centre is a
precondition to becoming an
international financial centre. This is because financial services
are induced by the
trading of goods and services in the modern economy. But an
international trade
centre, especially those – such as Hong Kong – based on
tangible goods, relies on an
international shipping centre for logistics services. As location
and site selection of an
international shipping centre is much more stringent than that of
an international
trade centre, the international trade centre often follows the
location of an inter-
national shipping centre rather than vice versa.
According to the neoclassical port-city model, economic
activities are often
concentrated in port cities which will become dominant national
cites (Hoyle, 1989;
IDPR31_4_05_Huang.indd 426 10/11/2009 12:17
Fujita and Mori, 1996). Most world-class economic, financial
and trade centres serve
concurrently as international shipping centres today. For
example, four well-known
international trade and financial centres, New York, Tokyo,
Singapore and Hong
Kong, are also international shipping centres, although the
shipping industry in New

York has passed its peak (DWTMC, 1999). Thus port
development and urban devel-
opment depend on each other as ports support the essential
logistics and shipping
services of large urban centres.
Many studies have examined the changing relations between
port and city (Hoyle,
1989; Lee et al., 2008; Notteboomm and Rodrigue, 2005;
Ducruet and Lee, 2006).
Lee et al. (2008) provided a comprehensive review of the
changing relations between
port and city in developed and developing countries. The
Western port city model
proposed by Hoyle (1989) has five stages. In the first stage of
primitive port-city, there
is close spatial and functional association between city and port.
In the second stage
of expanding port-city, rapid commercial and industrial growth
forces the port to
develop beyond the city confines, with linear quays and break-
bulk industries. In the
third stage of the modern industrial port-city, industrial growth
– such as oil refining
and introduction of containers and ro-ro (roll-on, roll-off) –
requires space and the
separation of city and port. In the fourth stage of retreat from
the waterfront, changes
in maritime technology induce the growth of separate maritime
industrial develop-
ment areas and the port no longer uses the waterfront in the
city. In the fifth stage
of redevelopment of the waterfront, urban renewal takes place
in the waterfront of
the old port. Large-scale modern ports consume large areas of
land/water space and

develop separately. Lee et al. (2008) added the sixth stage of a
general port-city, where
there is rising environmental concern for intermodal transport
and the city economy
develops like non-port cities.
Lee et al. (2008) proposed an Asian hub port-city consolidation
model, arguing
that the Western model is not appropriate. The first stage is a
fishing coastal village
with self-sufficient local trade. The second stage is the colonial
city-port developed by
dominant external interests for raw product exploration and
geopolitical control. The
third stage is the entrepôt city-port. With trade expansion and
entrepôt function, the
modern port develops through land reclamation. The fourth
stage is the free trade
port-city. Export-led policy attracts industries using port
facilities through tax-free
procedures and low labour costs. The fifth stage is hub port-
city. Port productivity
increases due to hub functions and the need to grow within a
limited port area due to
territorial pressure close to the urban core. The sixth stage is
the global hub port-city.
The old port maintains its activity and a new port is built due to
rising costs in the hub
and possible hinterland expansion.
According to Lee et al. (2008), a common aspect of all Asian
ports is the formation
of new ports, but a major difference from Western port cities is
that there is increasing
port activity in the original port areas close to the city centre in
Asian port cities. This

IDPR31_4_05_Huang.indd 427 10/11/2009 12:17
Yefang Huang428
is because the centres of Asian cities remain the most active
and important economic
centres. In Western countries, the volume of local cargo and
port functions have
declined due to de-industrialisation. Ports have been encouraged
to move from the
inner city to outer areas to leave waterfronts free for leisure and
service functions for
urban residents (Lee et al., 2008).
Although Asian port-city models show the difference between
Western and Asian
ports clearly, the differences between the Asian port-cities are
ignored. Singapore,
Hong Kong and Shanghai are three giant hub ports in Asia. Lee
et al. (2008) examined
Hong Kong and Singapore as global hub ports with high
intermediacy (connection
between different scales of a transport system) and centrality.
Shanghai has more
recently been acknowledged as a significant hub port and is
located within the YRD. It
is an emerging world city with a significant manufacturing
sector. Due to the different
positions of Hong Kong, Singapore and Shanghai in the world
economy and inter-
national shipping, this article will use Shanghai to demonstrate
that Shanghai’s global
hub port-city model differs from that of Hong Kong and

Singapore. The article now
turns to the context and the development of Shanghai
international shipping centre.
Opening and development of Shanghai in the reform
period
Shanghai was the biggest financial, trade and industrial centre
in China and the
Far East before the foundation of the People’s Republic of
China (PRC). It has also
been the most important port-city since the end of the
nineteenth century. After the
foundation of the PRC in 1949, Shanghai was turned into an
industrial and economic
powerhouse. It dominated the national economy in
manufacturing, commerce and
international trade between 1949 and 1978. Its fiscal revenue
accounted for one-sixth
of the total revenue of the Chinese government up to the
beginning of the reform
(Yeung and Sung, 1996). Shanghai was also famous for its
economic efficiency and
quality products. Its economic and technological achievements
are attributed to its
superior endowments, including an experienced labour force,
superior managerial
and technical skills, an established industrial foundation, higher
productivity, social
infrastructure and good supporting facilities (Yeung and Sung,
1996; Tian, 1996;
Hyslop, 1990). However, China had little foreign trade and the
Shanghai port mainly
served domestic transportation between 1949 and 1978.
International shipping services
increased only after 1978.

Shanghai experienced relative stagnation and even setbacks
during the 1980s
(Yeung and Sung, 1996). The central government was very
cautious about granting
SEZ (Special Economic Zone) autonomy to Shanghai (White III
and Cheng, 1998).
Only after 1990, when Shanghai was granted a status similar to
Guangdong through
the Pudong New Area policy, did it start to achieve fast urban
development.
IDPR31_4_05_Huang.indd 428 10/11/2009 12:17
The development of the Pudong New Area is central to
Shanghai’s ambition to
become the leading industrial, financial and trading centre in
China and the world
(Wu, 1999). ‘Infrastructure goes first’ has been a government
strategy since the early
1990s. A package of major projects has been completed. The
core projects include
‘three ports’ (a deep-water port, an airport and an infoport);
‘three networks’ (a rail
network, an urban highway network and a cross-river
transportation network); and
‘three systems’ (a power supply system, a natural gas supply
system and a central
heating system). The traditional commercial areas have also
undergone massive
redevelopment.
The investment environment in Shanghai has been improved

greatly. It has become
a prime destination for foreign investment and a major
commercial and business
centre. Significant amounts of domestic and foreign capital
have been invested in
Shanghai, especially since 1992. Its foreign trade has risen
rapidly since 1979. The
annual growth rate of the total value of imports and exports
was 19.71 per cent in
1985–2006 (Table 1).
Economic indicators 1985 1990 1995 2000 2004 2006
GDP (RMB billion) 46.7 75.6 246.3 455.1 745.0 1036.6
GDP per capita (RMB) 3764 5891 17323 19786 46298 57052
Investment in fixed capital (RMB billion) 11.9 22.7 160.2 187.0
308.5 392.5
Foreign capital actually utilised (US$million) 1.15 7.80 52.98
53.91 65.41 71.07
Total value of import and export (US$billion) 5.2 7.4 19.0 54.7
160.0 227.5
Table 1 Main economic indicators in Shanghai
Source: SMSB (2005; 2007). GDP per capita is calculated on
the basis of usual residents, including temporary
population
Table 1 also shows dramatic economic growth in Shanghai. Its
GDP reached
RMB1,036.6 billion and its GDP per capita reached RMB57,052
in 2006.2 With only

1 per cent of China’s population, Shanghai accounted for 5.5
per cent of its GDP, 4.4
per cent of investment in fixed capital, 9.5 per cent of cargo
throughput, 10.8 per cent
of foreign capital actually utilised and 24.5 per cent of the
total value of imports and
exports in 2004. Indeed, it has become an emerging world city
(Wu, 1999; 2000; Shi
and Hamnett, 2002; Huang et al., 2007).
At the very beginning of Shanghai’s take-off in the 1990s, the
central govern-
ment endorsed a grand strategy to develop international
economic, trade, financial
services and shipping centres in Shanghai. These four centres
are mutually supportive
and make Shanghai stronger than any single centre would. The
city made significant
2 US$1 =RMB7.9718 in 2006 (National Bureau of Statistics,
2007).
IDPR31_4_05_Huang.indd 429 10/11/2009 12:17
Yefang Huang430
progress in the development of four centres during the tenth
and eleventh five-year
plan periods (2001–10). The next section will examine the
development of Shanghai
international shipping centre and its relationship with urban
development.
Development of Shanghai international shipping centre

Opportunities for port development
Developing an international shipping centre is a key part of
urban development
strategy in Shanghai. The rationale behind this strategy can be
understood from
the relationship between hub port development and urban
development, which was
discussed earlier in the article. Figure 1 summarises the major
factors contributing to
the growth of the international shipping centre in Shanghai.
As shown in Figure 1, the open door policy and Pudong New
Area development
have stimulated FDI, manufacturing and international trade in
Shanghai, providing
significant opportunities for the development of an
international shipping centre in
the city (Airriess, 1993; Yeung and Shen, 2008b).
Figure 1 Formation factors of Shanghai international shipping
centre
Source: SMSB, 2007
IDPR31_4_05_Huang.indd 430 10/11/2009 12:17
Furthermore, the YRD is one of the most advanced economic
regions in China.
There is also rapid economic and export growth in these cities.
Much of the trade
and export income in the YRD relies on the port of Shanghai.
The total exports from

Shanghai and the YRD, respectively, reached US$64.3 billion
and US$201.7 billion
in the first half of 2007 (Shanghai Statistics, 2007). Thus, as
Shanghai and the YRD
are major exporters of manufactured products, there is a great
need to develop a
leading international shipping centre in or near Shanghai. As
discussed before, the
world port system shows a strong tendency towards
concentration in some global hub
ports due to changes in shipping technology and organisation
(Lee et al., 2008). Port
competition has also emerged in the YRD for the status of
leading global hub port.
Shanghai and Ningbo have the natural conditions to develop
large seaports (Wang
and Slack, 2004).
Various factors and considerations give Shanghai an advantage
in developing the
most important international shipping centre in the YRD. First,
it has an advantageous
geographical environment. Located in the mouth of Yangtze
River (6,300 kilometres
long) and the middle of the coastal area in eastern China (with
a 1,800-kilometre
coastline), Shanghai has a vast hinterland and is a centre for
business and cargo
distribution by land, river and sea. Second, Shanghai has a long
history of being
the national economic centre and was a treaty port (colonial city
port) in the period
1845–1949. Many investors have great confidence in investing
in Shanghai, which
further reinforces its urban development potential.

Development of port infrastructure led by the government
Due to these favourable conditions, the Shanghai government
has adopted an
ambitious strategy of port development with heavy investment.
Thus Shanghai
port has experienced significant growth both in port
infrastructure and container
throughput. It is now the largest multipurpose port in mainland
China and one of
the leading ports in the world, consisting of port facilities at
the mouth of the Yangtze
River, the Huangpu River and the northern part of Hangzhou
Bay.
As early as the 1930s, Shanghai was a world-renowned shipping
centre in the Far
East. Shanghai was the largest port in mainland China during
the Maoist period
between the 1950s and 1970s, but its international status
gradually declined in that
period. Since the introduction of reform and open door policies
in China in 1978, port
development in Shanghai has sped up. More significantly, the
Chinese government
approved the overall urban planning of Shanghai in the early
1990s with the clear
strategic goal of developing international economic, financial,
trade and shipping
centres there. Soon afterwards, a grand blueprint for the
Shanghai international
shipping centre was drawn up by the government. The policy
position of the central
government helps Shanghai overcome potential competitors
from nearby cities. For
IDPR31_4_05_Huang.indd 431 10/11/2009 12:17

Yefang Huang432
example, the central government endorsed the development and
administration of
the Yangshan container port by Shanghai, although the port is
located in Zhejiang
province.
Shanghai started as a fishing village. The initial river port was
located in the
Suzhou and Huangpu rivers. It grew along with the city, and
additional port terminals
have extended along the Huangpu towards the mouth of the
Yangtze in the twentieth
century. In the 1980s, a special river port for the transportation
of raw materials was
built on the south bank of the Yangtze for the largest steel
project, Baosteel, in China.
A sea port was built at Xiaoyangshan Island in 2005. Thus the
current Shanghai port
consists of both a sea port and an inland river port (see Figure
2).
The old river port of Shanghai was constrained by water depth.
The water in
Figure 2 Ports in Shanghai
Source: SMSB, 2007
IDPR31_4_05_Huang.indd 432 10/11/2009 12:17

the Yangtze estuary is only seven metres deep, and the third and
fourth generation
container ships could come in and out freely only at high tide.
The depth of the
water on the Huangpu is only seven to eight metres. The river is
too narrow and
container ships cannot turn around freely. Even with dredging
in the 1990s, the access
of large-scale container ships (1,400 twenty-foot equivalent
units [TEUs]) to the port
was restricted by its limited depth. Several attempts have been
made to improve the
capacity of Shanghai port since the 1990s, including the
deepening of the Yangtze’s
mouth, the Waigaoqiao deepwater port project in Pudong New
Area, and the
Yangshan deepwater port project. In the period 2001–05, over
RMB10 billion was
invested in port construction.
The Phase I channel renovation project at the Yangtze River
mouth was officially
started in January 1998. Its aim is to facilitate the construction
of container terminals
at the river mouth, so as to accommodate ultra-large container
ships in the future. In
accordance with the plan, the river mouth channel has been
deepened from 7 metres
to 12.5 metres in the past 10 years.
The Waigaoqiao deepwater project at the mouth of Yangtze
River was started in
1993. Its aim was to develop a port area of 1.63 square
kilometres with a water depth

of 13 metres, capable of accommodating four ships (4,000
TEUs each) at the same
time. Waigaoqiao Free Trade Zone was established to make use
of the port facility.
However, there were concerns regarding the feasibility of
maintaining a 13-metre
depth due to the silting of the river.
Due to the difficulty of maintaining water depth in the
Huangpu and the Yangtze,
and the rapid growth of container volume, the Yangshan deep
water port project was
finally chosen as a long-term solution to fulfil the ultimate goal
of developing Shanghai
as an international shipping centre. The project was approved
by the State Council
in May 2001 based on three feasibility reports submitted by
Shanghai, Zhejiang and
Jiangsu on possible deep water ports in their territories (Wang
and Slack, 2004).
Without this project, the growth of Shanghai port could have
been constrained in the
near future; Shanghai could have been replaced by Ningbo port,
which has a superb
water depth of 12.5 metres in its existing terminals, and 22
metres just 500 metres …
Lost Trust
The Real Cause of the
Financial Meltdown
F
BRUCE YANDLE

T
he financial collapse of 2007–2009 is recognized as having
caused one of the
most serious U.S. recessions since the end of World War II. To
put this
economic disruption into perspective, however, it is not enough
simply to
plumb the depths of lost wealth in real estate or equity
investments or the near or
actual collapse of banks, insurance companies, auto companies,
and city govern-
ments. Diffused by the high connectivity of a global economy,
this disruption must
also be considered by the speed with which the knowledge
economy repriced assets
worldwide, by the rapid pace of bankruptcies that followed, and
by the degree to
which governments and central banks opened the stops and
started pumping money
into wounded firms and institutions in an effort to reboot the
world economy.
Moreover, we should consider the extent to which private firms
became quasi–
publicly owned as once-celebrated free-market captains of

industry and finance lined
up for government bailouts. In addition to the obvious banks,
insurance companies,
brokerages, and financial institutions, the queue for bailout
includes cities, counties,
states, and even real estate developers and homebuilders.1
If one could display credible charts comparing U.S. economic
disruptions from
the nineteenth century forward, the 2007–2009 collapse would
not be likely to take
the blue ribbon when measured in conventional terms, such as
unemployment,
Bruce Yandle is professor of economics emeritus at Clemson
University and distinguished adjunct profes-
sor of economics at the Mercatus Center at George Mason
University.
1. On the latter two, see Timiraos 2008 and Wei and Hilsenrath
2008.
The Independent Review, v. 14, n. 3, Winter 2010, ISSN 1086–
1653, Copyright © 2010, pp. 341–361.
341
business failures, and mortgage defaults.2 But one trait might
distinguish it from the

rest. In this disruption, major elements of global credit markets
were disrupted. For
some major firms, credit markets stopped functioning. For
example, French automo-
tive giant Renault reported that money markets were frozen
following the collapse of
Lehman Brothers (Abboud and Gauthier-Villard 2009). The firm
could not get
access to the credit needed to function normally. Like many
others, Renault had to
slash operations to conserve cash. Municipalities, universities,
and other borrowers
accustomed to gaining access to cash through the municipal
auction-rate market
found the market completely closed. No transactions took place
for weeks at a time.
The credit market pause of mid-September 2008 was not the
result of bank runs
triggered by central-bank credit cutbacks, where depositors and
investors sought to
get their money, as in 1933; nor did it evince a lack of liquidity,
as in the panics of
1873, 1884, 1890, 1893, and 1907 (McDill and Sheehan 2006).
The problem this

time was lost trust. Indeed, the 2008 disruption is probably the
only one that re-
sulted from a sudden breakdown of assurance mechanisms—the
generators of trust—
rather than from action taken or not taken by misguided central
bankers. Thorold
Barker (2009) offers a timely comment along these lines,
focusing on Wall Street
executives’ opportunistic behavior: “But beyond the power
struggles, huge losses
and increased regulation, there is a more fundamental threat to
the industry: the
destruction of trust.”3
On September 17, 2008, following (1) the government takeover
of AIG, the
world’s largest insurance company, (2) a government-arranged
merger between a
financially wounded Merrill Lynch and an assisted Bank of
America, (3) government
refusal to save Lehman Brothers, and (4) panic-inducing
statements by top federal
officials, individual agents worldwide lost trust in other
economic agents and institu-

tions (“The Doctor’s Bill” 2008, 82). On September 18, banks
began hoarding cash,
corporations could no longer issue commercial paper except for
much shorter terms
and at much higher rates of interest, municipal-bond auction
markets ceased to
function, and London interbank lending collapsed. With heavy
scrutiny focused on
mortgage-backed and related assets, banks worldwide, by the
International Monetary
Fund’s reckoning, saw the prospect of losing $10.0 trillion in
write-offs (“When
2. There are few ways to draw empirically based comparisons
across time owing to the lack of comparable
unemployment and other data. David Wheelock makes a
comparison between the current housing-market
collapse and related events that are simiilar to housing-related
events in the Great Depression, noting that
in January 1933 approximately one-half of all U.S. mortgages
were in default, with new defaults being
added at the rate of one thousand per day. Meanwhile, personal
income fell 41 percent from the 1929 level
(2008, 3). At this January 2009 writing, we are far from such
depths.
3. For a scholarly treatment of the systematic inverse
relationship between trust and regulation, see
Aghion et al. 2009. Stan Liebowitz (2008) explains the
mortgage-default crisis, an important part of the
origins of the credit-market collapse, by focusing on the decline

of mortgage-lending standards with
government encouragement and the rise of adjustable rate
mortgages, which of course relates to lower
lending standards. Discussion of these mortgages in the press
indicates that these loans often had subprime
characteristics, which is to say that little or no attention was
paid to the borrowers’ creditworthiness and
the implications of what would happen when the mortgages
adjusted (“High Dive into the Toxic Pool”
2009; Simon 2009).
342 F BRUCE YANDLE
THE INDEPENDENT REVIEW
Fortune Frowned” 2008, 4). More than $1.3 trillion in U.S.-
originated mortgage-
backed securities suddenly had uncertain value (“When Fortune
Frowned” 2008, 4).
Included in the mess were approximately 2,500 mortgage-based
securities backed by
subprime mortgages (Steidtmann 2008).
Along with write-downs and other financial losses, critical
assurance mecha-
nisms for the purpose of engendering trust across economic
agents collapsed. Major
institution failure prevailed. Trust, a most fragile human
sentiment, had taken a walk.

In times of financial distress, central banks can provide
liquidity and lay the
groundwork for creating money. Governments can increase
spending, reduce taxes,
and purchase sick assets. Presidents can exhort, and captains of
industry can capitu-
late. These costly actions can matter, and may indeed generate
an economic response.
But none of these actions, alone or together, can rekindle trust
once the flame has
flickered out.4
What caused assurance mechanisms to fail? What triggered lost
trust? And how
does the trigger point fit into the larger explanation of the credit
collapse?
In this article, I describe the anatomy of the credit collapse and
identify a series
of necessary but not sufficient conditions for collapse to occur.
As a result of politi-
cally expanded markets and other policies, three assurance
mechanisms designed to
buttress trust—independently determined credit ratings,
international accounting

standards, and credit-default swaps—became trust solvents that
seriously under-
mined the basis for believing in the creditworthiness of
individual agents and their
institutions. As the solvents did their work, assurances were
dissolved, trust evapo-
rated, and financial markets ceased to function effectively. I
begin with a discussion of
how trust evolves in the formation of markets. Then I describe
the institutional
skeleton that accommodated the globally expanding U.S.
subprime mortgage prob-
lem. Finally, I focus on the enabling agents of trust that
connected global investors
and creditors, whose demise ends the story.
Trust and Market Morality
Practically all market transactions depend on some degree of
trust. Consider some
simple actions. I fill the tank of my car with fluid from a pump
at a 7-11 store I have
never visited, trusting that the fluid passing through the hose is
gasoline. I walk into
a large TESCO superstore in Prague, a store and company I
have never patronized,

and buy a supply of groceries, including fresh fruit, soups, and
coffee. I consume the
items without a second’s concern about their safety. I e-mail my
broker and tell him
I want to buy a thousand shares of stock. He writes back and
tells me that I must talk
with him because for securities are based on voice transactions.
My broker trusts
my voice, but not my e-mail. Written contracts do not work
effectively in this setting.
4. Robert J. Shiller (2009) discusses lost trust and what it will
take to rekindle the flame in terms of
massive government action. His very helpful analysis seems to
focus more on the U.S. economy.
LOST TRUST F 343
VOLUME 14, NUMBER 3, WINTER 2010
My broker is employed by a firm with a wonderful name and
brand—at least such
seems to be the case because, quite honestly, I have never
checked the firm’s financial
strength. Indeed, the whole idea of a firm and financial strength
is an abstraction.

Trust is somehow rooted in individuals. Within all these
examples, truth telling and
promise keeping are typical features of ordinary commercial
life. The marketplace is
infused with trust. How did this condition come into being?
F. A. Hayek (1991) tells a compelling story about rational
thought, the extend-
ed order, and market morality. In his story, market morality—
truth telling and
promise keeping and other behavioral norms or rules—evolved
over the millennia
through market interaction. Hayek sees trust-forming rules as
resting between in-
stinct and reason in the spectrum of bases for human action. In
his story, trust plays a
vital role in small-group settings, where informal rules and
traditions form a basis for
trust. Trust generated by other devices then delimits the reach
of an extended order
that enables resource-conserving transactions and specialization
to extend across
space and time. Simply put, in the absence of market-generated,
trust-forming
devices, transacting parties cannot afford enough police and

regulators to induce
honest behavior among ordinary people. Trust and trust-assuring
mechanisms can
be low-cost substitutes for police, regulators, and court actions.
The formation of the law merchant in the early Middle Ages, a
private law
process that extends to modern times, is a case in point. The law
merchant, a body
of evolving judge-made law that formed in merchant-organized
courts, was devel-
oped by adventurer merchants who traveled extensively from
their home countries.
“[G]eographic distances often prevented direct communication,
let alone the build-
ing of strong personal bonds that would facilitate trust. . . .
Internationally recog-
nized commercial law arose as a substitute for personal trust”
(Hamowy 2008, 286).
The law merchant was a private, market-driven phenomenon
that did not emerge
from or depend on government action.5
James Buchanan develops another explanation of ethical
behavior in a small-

numbers setting (1994, 66–71). He describes a social process in
which interacting
individuals signal a willingness to assist each other, to share
resources in the absence
of having formal or informal contracts. The process he
describes fits into Hayek’s
story about trust and its evolution. Sam Fleischacker (2004)
offers a somewhat
similar interpretation of Adam Smith’s oft-quoted statement
about the baker, the
brewer, and the butcher in their connection with providing the
evening meal. He
suggests that more attention be paid to the sentences just
preceding the more famous
ones: “[M]an has almost constant occasion for the help of his
brethren, and it is in
vain for him to expect it from their benevolence only. He will
be more likely to prevail
if he can interest their self-love in his favour, and shew them
that it is for their own
advantage to do for him what he requires of them” (Smith
([1776] 1904, 14)
5. For more on this topic, see Ridley 1996, 202–4. Leon
Trakman describes the demise of the medieval
form of law merchant and that law’s merger into common and

code law (1983, 24–27).
344 F BRUCE YANDLE
Fleischacker emphasizes the importance of being able to
“interest” and “shew” one’s
“brethren”—perhaps an example of Buchanan’s signaling.
Frank Fukuyama also emphasizes trust as the mechanism or
social norm that
enables economic growth to occur beyond the bounds of small
groups. Holding
trust constant, his analysis suggests that an expanding
knowledge economy can
eliminate the need for large organizations and hierarchical firms
because, in his view,
hierarchies exist for quality-assurance purposes (1995, 24–25).
He indicates that
firms and other organizations become larger through vertical
integration in part
because of the cost of assessing trustworthiness when dealing
beyond the firm’s walls.
Following this logic, we might forecast that the current
financial collapse will be a

force leading to trust-forming mergers and consolidations, aside
from those that
might occur because of financial ratios and reserve
requirements.
Daniel B. Klein (2002) considers the matter of trust in
commercial settings
where consumers seek assurances that the transaction outcome
they desire will actu-
ally be delivered. He focuses on assurance, describing the
demand for assurances, the
willingness to pay for benefits received, and suppliers who
provide assurances. Using
auto repair as an example, Klein explains how multiple
assurance mechanisms are
supplied so that trust emerges in the consumer’s mind. With
trust comes confidence
in using the services of a particular repair company. The
assurance mechanisms may
include seals of approval, extended third-party warranties, the
reputational capital of
the service firm or owner, and recommendations from other
customers of repair
services that can be assessed directly only through experience
(Nelson 1970).

Brink Lindsey also argues that “formal institutions are not
enough.” These
institutions must also be buttressed by “invisible bonds of
reciprocity that restrain
members of society from taking advantage of each other to the
maximum extent the
law allows.” He identifies “hard” institutions, such as police
and courts, and “soft”
institutions of cultural values that “allow agreements to be
enforced between total
strangers across the span of years and continents” (2002). As
the extended order
reaches the limits of social space, cutting across diverse
cultures and norms, trust
reliance itself becomes costly. Brands, insurance, hostages,
credentials, certification,
and common and code law rules become increasingly valuable.
Certified financial statements that use globally recognized and
understood ac-
counting standards form one of the key assurance-building
blocks for trust formation
in financial markets. When the standards evolve from market
transactions, they may

be viewed as part of the assurance mechanisms that form
Hayek’s market morality.
When standards are distorted politically or on the basis of
regulatory expediency, they
lose their market-generated moral bearings because they no
longer reflect market-
based knowledge. Credit ratings form another part of trust
technology. The compet-
itive determination of ratings by such firms as Standard &
Poor’s, Moody’s, and
Fitch helps agents to make trust-forming evaluations across the
otherwise more
opaque records of market participants. When ratings no longer
reflect competitive
market forces, their moral worth diminishes and trust erodes.
Certified statements
LOST TRUST F 345
and credit ratings can be buttressed with specialized insurance
that spreads risk and
reduces the cost of investing in risky bonds and other securities.
Insurance such as

credit-default swaps, which became a significant component of
global financial mar-
kets in the period from 2001 to 2008, facilitated the purchase of
homes nationwide.
Along with audited statements and credit ratings, they formed
part of a complex
bundle of market-generated, assurance-forming devices that
energized the expansion
of the extended order.
Market-formed assurance mechanisms constitute part of the
institutional frame-
work in which financial transactions occur. When these
institutions are formed by a
competitive process, they support a market morality that
generates confidence and
trust. Institutional failure may arise, however, when political
and regulatory distor-
tions affect the operation of these trust-forming institutions.
How a Regional Subprime Mortgage Problem
Became a Financial Nightmare
According to economist Lawrence H. White (2008), the 2008
financial collapse
originated with a political effort to expand mortgage lending to

consumers who
could not meet normal standards of creditworthiness. What was
later to be called
“the subprime problem” began as an “affordable home” program
that shoved aside
market-based constraints. As White documents, the impetus
came with congressional
strengthening of the Community Reinvestment Act, the Federal
Housing Adminis-
tration’s loosening of down-payment standards, and pressure
exerted on mortgage
lenders by the Department of Housing and Urban Development
to lend to the
unqualified. As might be expected, the most politically
responsive mortgage lenders
were the two government-sponsored enterprises, Freddie Mac
and Fannie Mae,
which had been organized politically to expand U.S.
homeownership opportunities.
White explains how federal efforts to make home ownership
more affordable
began seriously in 1934, when the Federal Housing
Administration was formed for
the purpose of insuring mortgages made by private lenders to

qualified borrowers.
This action taken in the depths of the Great Depression was
intended to shore up
housing markets while other federal action was under way to
acquire defaulted
mortgages and properties affected by the general hard times.
But one might go back
even farther, to the Homestead Act of 1862, to find politicians
seeking to help
Americans achieve the Jeffersonian dream of land and home
ownership. Although
approximately two million homesteaders took advantage of this
opportunity to settle
in the new West, about 60 percent of them failed—or, in a more
modern sense,
defaulted on their mortgages (Warren 2008).
The more recent political urge to expand homeownership
beyond the limits
of real capability received a major stimulus from President Bill
Clinton, when he
pushed an “affirmative action” program for housing and set
quotas for Fannie Mae
346 F BRUCE YANDLE

and Freddie Mac to buy poor-quality mortgages made to low-
income families
(“The Subprime Lending Bias” 2008). By 2000, these
mortgages, many of which
were subprime, made up half of the two government-sponsored
enterprises’ loan
portfolios.
George W. Bush followed in Clinton’s footsteps in December
2003, when he
signed a new law with the wonderful name “the American
Dream Downpayment
Act” (“White House Philosophy Stoked Mortgage Bonfire”
2008). The accompany-
ing U.S. Department of Housing and Urban Development (HUD)
press release
described the logic of the law this way: “There is a reason why
many American
families can’t buy their first home—they can’t afford the
downpayment and other
upfront closing costs required to qualify for a mortgage. For as
many as 40,000 low-

income families, that will change as President Bush today
signed The American
Dream Downpayment Act into law” (U.S. HUD 2003).
Congress backed the law by authorizing $200 million to bring
assistance to
5.5 million families by the end of the decade. This goal brought
the aforementioned
HUD pressure on Fannie Mae and Freddie Mac to open the
money valves. The effect
of the larger flow of credit can be seen in terms of subprime
lending. From 1993 to
2003, new subprime loans accounted for 10 percent of all
mortgages (Hall and
Woodward 2008). In 2004, subprime’s share rose to 26 percent;
in 2005, to 28 per-
cent; and in 2006, to 40 percent. From 2005 to 2007, Fannie
Mae and Freddie Mac
purchased approximately $1 trillion in subprime and low-quality
(Alt-A) mortgages,
which amounted to 40 percent of the total mortgages purchased
in those years
(Wallin 2008, 5). Washington Post writer Caroline Leonnig
would later explain the
situation that followed:

In 2004, as regulators warned that subprime lenders were
saddling bor-
rowers with mortgages they could not afford, the U.S.
Department of
Housing and Urban Development helped fuel more of that risky
lending.
Eager to put more low-income and minority families into their
own
homes, the agency required that two government-chartered
mortgage
finance firms purchase far more “affordable” loans made to
these bor-
rowers. HUD stuck with an outdated policy that allowed Freddie
Mac
and Fannie Mae to count billions of dollars they invested in
subprime loans
as a public good that would foster affordable housing. (2008)
Pressure on the two government enterprises to enrich an
aftermarket for sub-
prime mortgages, an action that would ultimately force them
into bankruptcy, was a
necessary element in the story, but not sufficient. Pressure
alone could not bring cash

to the store. The political dream had to be accommodated with
expanded credit and,
as White (2008) shows, the Federal Reserve Board chose to
provide that credit.
Evidence of the Fed’s accommodative stance is shown in figure
1, which dis-
plays data on the auction rates for six-month U.S. Treasury bills
and the six-month
LOST TRUST F 347
London Interbank Offer Rate (LIBOR) for 1995 through March
2009. The six-
month LIBOR is used widely in adjustable-rate mortgage
(ARM) contracts. As the
figure shows, both the T-bill rate and the six-month LIBOR fell
sharply from June
2000 to September 2003 and remained relatively low through
2005. The attractive
rates were applied to ARMs that, as White puts it, “shifted the
risk of refinancing at
higher rates from the lender to the borrower” (2008, 4). Many
borrowers accepted a

bet that the Fed would keep rates low for a much longer time.
As the more recent
data in the figure indicate, those who made that bet early in the
game were wrong.
Just as surely as the Fed eased in an effort to foster a faster-
growth economy, it later
hit the monetary brakes to slow the great American bread
machine before it over-
heated. Therefore, the rate applied in the ARMs adjusted
upward, and what had
looked like affordable housing to people who borrowed when
rates were low began
to look more like the subprime problem when the same people
found their mortgage
payments no longer fit the family budget.
Rising interest rates associated with Fed tightening generated
severe default
effects across the United States in three regions: the industrial
north-central states,
where the older auto industry (long in decline) was centered;
the far west, with
California, Arizona, and Nevada bearing the brunt; and Florida,
where rapid con-
struction of condominiums and houses now created a large

inventory of unsold
homes. Figure 2 shows the frequency of defaults across the
United States in the first
quarter of 2008. As noted, the default problem was most severe
with subprime ARMs.
Thus, an accommodating Fed, which put money on the table
only to take it
away later, was a necessary part of the financial collapse. But
putting money on the
Figure 1
Six-Month T-Bill and LIBOR Rates, 1995–2009
348 F BRUCE YANDLE
table was not sufficient to generate a global financial collapse.
For the U.S. subprime
problem to reach the limits of the global economy required
something else, which
was trust.
Transmitting Trust in Mortgage Markets
To identify the institutional failure that destroyed trust, we must
first describe

the assurance transmission itself. We begin with a highly
stylized description of the
market that had evolved in the early twentieth century. In a
rudimentary way, the
mortgage market begins when an individual seeks to borrow for
the purpose of
acquiring real property—a home or commercial real estate.
Lending institutions
represent savers and investors who put their money at risk in the
hope of earning a
return. Lending intermediaries, such as local savings and loan
associations and banks,
consider mortgage applications and make decisions based on the
borrower’s credit-
worthiness and the likelihood of maintaining a pool of savings
to fund the debt.
Through time, savers and investors identify dependable
intermediaries; these institu-
tions are the ones that can maintain a more stable supply of
lendable funds. Inter-
mediaries maintain their ability to be a dependable supplier—
one that can be
trusted—by enforcing standards of creditworthiness on
borrowers. This rudimentary

system has a tolerance for error that is determined by the
competitive marketplace.
In a close-knit community with common ethical norms, trust
identification comes
easier than where borrowers and investors are far removed from
one another. In the
more distant cases—the extended order—market-generated
assurance mechanisms
become critical.
Figure 2
Frequency of Defaults across the United States, First Quarter
2008
LOST TRUST F 349
In the twenty-first century, mortgage markets reached the limits
of the extend-
ed order. The borrowers and lenders described earlier were still
an integral part of a
closed system, which is to say that the system relied on
resources contained in it and
generated by it. There was no exogenous source of bailout
money, but additional

components that globally expanded the availability of lendable
funds had been added
to system. The direct lender, who previously made a mortgage
and kept it on the
books until it was paid, had been largely displaced by lenders
who originated a
mortgage that they then sold to another intermediary who
bundled a large number
of mortgages, or pieces of them, to be securitized. The bundle
of mortgages became
the collateral for bonds that were sold around the world. As the
system expanded to
global limits, assurance mechanisms became more critical to the
continued working
of the system. It was costly for investors in Asia who might be
interested in U.S.
originated, mortgage-backed securities to assess the
creditworthiness of an original
borrower in a particular Atlanta, Georgia, neighborhood or of
the lending institution
that made the original loan. At the same time that global
investors were buying U.S.
mortgage-backed securities containing subprime components,
those same securities

also looked good to U.S. financial institutions and investors. As
a result, U.S. and
other financial institutions began to borrow short and invest
long, much as the
savings and loan industry had done before the 1980s collapse.6
All along, market-
derived assurance devices were supplied to reduce the cost of
trust formation.
Credible, market-tested, international accounting standards and
credit ratings
buttressed or replaced trust between known individuals that
otherwise might have
been required. Instead of trusting in individuals or their firms,
global investors placed
their trust in credible symbols and rules. With reliance on
accounting standards and
credit ratings, the closed system functioned to provide mortgage
access to individuals
with different levels of creditworthiness. The supply of
different-quality mortgages
responded to market demand. As the appetite for risk increased
globally, the quantity
of low-quality, mortgage-backed bonds increased. Quality
assurance could be held

constant within the closed system so long as the assurance
mechanisms functioned
effectively, which is to say so long as no institutional failure
occurred.
The process by which subprime mortgages are originated,
securitized, and sold
in international markets contains critical trust-communicating
intersections. The first
intersection occurs at the mortgage’s origination, when a
potential borrower works
with a lender’s agent to write a mortgage contract. At this stage,
both parties have an
6. Anil Kashyap, Raghuram Rajan, and Jeremy Stein (2008)
argue that the debt and investment imbalance
was the main contributor to the financial mischief banks
brought on themselves. Once defaults began, an
affected bank had to sell mortgage-backed securities to cover
losses. This sale reduced market prices for
those securities, which, given mark-to-market accounting rules,
forced other banks to write down their
mortgage-backed assets. This write-down in turn led to more
sales and a continued downward spiral. In
other words, the composition of balance-sheet assets, coupled
with mark-to-market accounting rules, was
a major source of instability. See also Meiners and Yandle 1991
for the argument that the combination of
government-required deposit insurance and partial deregulation
encouraged excessive risk taking and
destroyed the …

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